What's The Economic Impact If The Tax Break Dies?

Mary Polocy (left) stands in line to enter a career fair in Independence, Ohio, in November. Congress has yet to agree on a measure that would extend unemployment benefits.

Tony Dejak
/ AP

Originally published on December 22, 2011 2:28 pm

Most political analysts say that Congress and President Obama will eventually agree to extend the payroll tax cut into 2012 – even if it takes another month of arguing.

But what if Congress really can't get it done?

Economists are fairly unanimous in saying growth would be slowed — at least in the short term — if Congress were to fail to pass legislation to extend the tax holiday and include two other proposals to: 1) continue federal help for the long-term unemployed and 2) block a 27 percent Medicare pay cut for doctors.

They say the impasse could reduce consumer spending, slow growth and disrupt the health care sector. Failure to act on all three measures would cut economic growth by a combined 1.5 percentage points in the first half of 2012, according to a forecast by Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

'A Significant Headwind' To Growth

Without the extensions, the U.S. economy will face "a significant headwind to consumer spending growth," Feroli said in a written analysis.

The chain of events leading to this congressional deadlock began Saturday when the Senate voted 89-10 in favor of a bill that would have addressed the tax break, unemployment benefits and Medicare reimbursements. But on Tuesday, House Republicans rejected the bipartisan legislation and instead urged the Senate to appoint members to a House-Senate conference committee to keep negotiating.

It is unclear what will happen next on Capitol Hill. But if no action is taken, about 160 million workers will see their take-home pay fall on Jan. 1, when the existing payroll tax holiday is no longer in effect.

For the full year, the average household — making about $50,000 a year — would have about $20 a week less to spend. Economists say that drop in take-home pay would be noticed at gas stations, restaurants, clothing stores and elsewhere.

Consumer spending also would contract if the long-term unemployed see their extended benefits cut off. Currently, the typical recipient gets about $300 a week in jobless benefits. Traditionally, those checks come from the states and last only 26 weeks.

But when the severe recession hit in 2008, Congress passed the Emergency Unemployment Compensation Program to help states extend those benefits up to 99 weeks.

Since 2008, the program has paid out $183 billion, and it currently is helping more than 3 million unemployed people get emergency funds. If Congress does not renew the program, those unemployed workers will start seeing their benefits dry up — at a time when more than 13 million people are still seeking work.

IHS Global Insight, an economic forecasting firm, examined the impact of extended benefits for the unemployed and concluded that they "clearly had a significant impact on the U.S. and state economies."

The loss of those benefits would harm the U.S. economy by reducing income for many households. Because of just this one change in federal policy, "growth will be stunted by 0.2–0.3 percentage point due to the direct link between the program and consumer spending," the firm concluded.

An Impact On Health Care

On the Medicare issue, congressional failure to block an impending 27 percent cut in reimbursements to providers could disrupt the health care sector.

Medicare manages the medical-care coverage for about 49 million Americans, most of them age 65 and older or disabled. Many doctors say they would not be able to accept new Medicare patients if the government allows the largest-ever reimbursement reduction to go forward.

The reduction in the number of patients and government reimbursements could lead to layoffs at doctors' offices and hospitals, some doctors say.

White House spokesman Jay Carney on Wednesday told reporters that failure to enact legislation would be "harmful at this time where we're still in a fragile stage of our economic recovery, where things are getting better but are far from good enough."

Most Republicans agree. Michigan Rep. Fred Upton, appearing on CNN, said, "Most of us on both sides, House, Senate, Republican, Democrat, are on the same page. We want a one-year extension of the payroll tax. It means, to the average family, $1,000 — which is a lot of money."

But so far, the Senate and House leaders have not agreed on a plan to pass the legislation before Dec. 31.